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What If the Government Can’t Afford a Bailout?

By Floyd Norris January 27, 2009 2:34 amJanuary 27, 2009 2:34 am

ZURICH, en route to Davos

What is a poor government to do?

Judy Dempsey reports today on the rising anger over the financial crisis in smaller countries. The focus is on the fall of the government in Iceland, where the collapse of the banking sector sent the economy into a tailspin. But Iceland is not alone:

The Latvian government, which this month pushed through wage and spending cuts but also tax increases in order to cope with the banking crisis, faced demonstrations that turned into violent riots. Neighboring Lithuania also had to contend with protesters after the government introduced a package of austerity measures to protect the financial sector.

Note that combination: raise taxes and cut wages.

That is in sharp contrast to the bailout plans in Washington, where the government is confident it can borrow the money it needs to increase spending and cut taxes. It has a dollar printing press, of course, something Latvia and Iceland lack.

Britain is also being shaken by the need to rescue its banking system, which, in relation to G.D.P. or national debt, is far larger than the American one. That is a major reason the pound is down to about $1.40 from over $2.

Call it the curse of the banking class. If a country had an outsized financial sector, it now has outsized problems.

I’m not an economist, however as I sit here and watch the ongoing of the stimulus bill and new administration (who I supported both with actions at the local level and via financial support) one doe shave to wonder what will become of the $850 billion and climbing by the day stimulus package.

Until the administration acknowledges and works to correct the housing mess in this country, things are not going to turn around. One can throw all the newly printed dollars they want into a new federal fleet of electric cars ($6 billion to prop up the automakers and a hedge fund – Chrysler who made a bad bet), $ 20+ billion at EMR software that does not work as promised, has never returned a positive ROI and is not wanted in the current form by the healthcare community (sure a lot of marginal vendors will make a on of $’s off the taxpayer – they could not do it themselves, so here comes Uncle Sam), the list goes on and on, at the endof the day I have very serious doubts as to the benefits of the current proposed stimulus package working, and the failure will take us to new lows that we have never experienced. At that point will China and/or India be the new world leaders? I hope not, however I am starting to lose faith. Americans as a whole had better be prepared for the high rate of inflation heading their way – the Jimmy Carter years may look good as we move forward.

Small countries aren’t the only ones with problems. As Mr. Norris notes, we in the U.S. have a printing press that prints U.S. dollars. On the theory that the Yen is not large enough to serve as a reserve currency, the Euro is in danger of collapse (Spain, for example, must night not make it), the British Pound is weaker than it has been in years, we are the last man standing.

This we are told means that the U.S. can assume the “leadership role,” whatever that means. Who can stop us? Time perhaps to review Classics 101 and the section on the Greek tragedy. The “Who can stop us?” mode of thinking is called is called “hubris,” isn’t it? But surely that can’t apply to humble old us. Or can it?

We have never really been in a global economy; so we do not know quite what it will be like if this one collapses. Perhaps it will depend upon why it collapses — constraint of trade and protectionism; competitive devaluations and beggar thy neighbor policies; the rise of state capitalism (viz. state-owned businesses setting economic plicy for the “benefit of the people” rather than on economics merits determined by a free market). Perhaps it will be grinding recession or hyper-inflation or some hideous combination of the two. Who knows? But because we do not have a clear vision of the collapse of the global economy; we are tempted to grasp at anything that provides immediate relief no matter how great the risk.

Which brings us to the current aggregator-bank-mark-to-model proposal. On this theory, the U.S. will assume the bad loans of financial institutions in exchange for reserves that will be lent out (with multiplier effect) to the very people who couldn’t repay their loans in the first place. (After all, if the banks do not lend out the money, there will be insufficient “stimulus.”) So, mirabile dictu there will be more “liquidity” (Isn’t it grand?) to buy foreign goods and fancy cars and mcmansions, and the spinnning wheel will spin again. Until, of course, those very same borrowers can’t repay their new loans, and the newly rescued financial institutions (Including those newly rscued in countries with “weak” currencies) begin to sink again. But never mind: The “animal spirits” are rising, (Can’t you feel it?) and the mere suggestion of bailouts and increased liquidity have sent stock futures higher tonight, Tuesday evening. Happy days are here again!

The dominos of sovereign defaults will make quite a clang…with the loudest coming from the biggest domino that traded one package of market myths, “RE never GOES down in all markets, and markets can self-police” for a fresh new market myth: “we can print dollars and fine-tune & modulate precisely when to stop the presses so as to ‘avoid trouble'”. Yeah, right.
There are no ‘Goldilocks’ controls or outcomes possible for the Dollar Printing Press. And the American media is once again too cowered (this time by their own fears that 1) their Golden Retirement will not come to past and that 2) personal self-sacrifice = financial market collapse) to even ask difficult questions of Geither/Bernake/Obama aimed at debunking this latest cherished myth.

Well I’m sat here in the uk watching as everything falls apart; the government seems fixated that saving the banking system is (a) vital for everything else and (b) equivalent to shoring up the current banks. Maybe (a) is debatable, but why on earth is it vital that we maintain a bunch of shoddily-run companies that even now (for example Northern Rock) are paying bonuses on one hand while recieving handouts on the other ? If they are “fundamentally vital” to the ecconomy then we are “fundamentally” f***ed.

Now they are also, like the US, looking to bail out the car industry. Man I give up ranting about this, time to get on the gravy train. I work in the semiconductor industry – WHERE’S MY BAILOUT ? I want some of that too !

Hey Floyd, hope you enjoy Switzerland. Just remember, if worst comes to the worst, they got more bomb shelters there than anywhere else on the planet.

Taxes? What are those? The War Tax is going to be zero here, next year, but we are burning through trilliions on two wars bordering Iran. What’s everyone so worried about? We didn’t object this forcefully to that insane spending spree. And most of what we paid for other than troops and their support has been blown up again or was a fraud.

We are going to be far more scrupulous over these dollar’s effectiveness, but if we have to buy baby a dimond ring, we’re marching out of this thing, together. Onward, America. You could lose a few pounds, anyway.

Dare I push it, Floyd? The War Tax is the estate tax intended by our founding fathers to place the burden of warfare on those who benefit most from its high cost. It is intended to be a restraint against the urge to war for passion or profit by those most likely to call for it. We paid off every war with the estate tax and occasional additional taxes on ALL of us until Korea. That meant there was no estate tax during periods of our nation’s history. Eisenhower wasn’t just warning us, he was warning rich folks, too.

Since we keep a standing army, we kept a standing estate tax. The wedge of revenue the estate tax delivered in 2000 was 30%. That’s what the Defense Department spent. But since we untied the War Tax from the wars, we have diminished it’s collection to less than 3% today, and bye bye War Tax, next year. By the sacrifice of our troops and treasure, the wealthy will die safe in their property although admittedly that War Profit the War Tax was meant to catch is gone, pfffft. They will pass their property to whom ever they wish as a priviledge without paying for the lost and damaged lives and the tremendous cost to the national treasure. Way to go Pirates!

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